If you mine, trade, or hold Bitcoin or any other cryptocurrency you have to pay taxes on them. Depending on how you acquired them will determine what type of taxes you must pay. Before I get to far into this please know I am not an accountant or attorney nor have I stayed in a Holliday Inn express but I have read up on this quite a bit.
The IRS considers cryptocurrencies, including Bitcoin, to be “intangible property.” If you hold or trade crypto you are subject to capital gains tax. For example, if you buy Bitcoins with U.S. dollars and later sell them for U.S. dollars, a capital gain or loss needs to be reported on that transaction. Also if you Trade Bitcoin for another coin you are required to pay as well. For example you buy a Bitcoin at $2000 and it goes up to $2500 and you trade your Bitcoin for 100 Litecoins at $25 you have to pay taxes on the $500 gain in Bitcoin. Then the ticker starts over with the 100 Litecoins at $25.
If you mine Bitcoin you must report your coins as income. It would be filed under your gross income. As the coins are mined you have to assess the fair market value for the day you received them. Also you can deduct electric cost and mining equipment in your deductions.
Tax Tips for Casual Bitcoin Users
• Establish a record-keeping system.
• Keep track of when you acquire and when you dispose of bitcoins.
• Record dispositions of bitcoins on Schedule D and Form 8949.
• Each purchase using bitcoin is two transactions in one: an implied disposition and an expense.
Tax Tips for Bitcoin Investors and Speculators
• Establish a record-keeping system.
• Record dispositions of bitcoin on Schedule D and Form 8949.
• Identify your cost basis method.
• Identify your exchange rate.
• Keep separate wallets for short-term trading, long-term buy-and-hold positions, and personal spending.
• Normal capital gains strategies apply: offset gains with losses, time dispositions to qualify for long-term treatment, harvesting losses, and harvesting gains.
• Watch the tax rates: gains subject to the 3.8% net investment income tax.
• Identity the tax treatment for bitcoins received by "mining" them – may be business income subject to the income tax and self-employment tax.
• Deduct any investment-related expenses (Schedule A).
• Deduct any investment interest (Schedule A).
• Deduct tax preparation and advisory fees related to determining the tax treatment of bitcoins (Schedule A).
• Elect Market to Market trading? This would mean all gains are short-term and reported on Form 4797, and any bitcoin-related expenses are deducted on Schedule C.
What If I Don’t Report My Bitcoin Income?
Tax Tips for Bitcoin and Virtual Currency
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